Book contents · Chapter 5 of 11
Margins shrink when costs rise faster than prices, and in most small businesses nobody is watching the gap. The fix is to know the real cost and margin of each job, product or customer, review prices on a set rhythm instead of when it hurts, and compete on value with the customers who pay for it rather than on price with everyone. In Numbers-First Management this is the job of the Money Engine.
What are the signs your prices are not keeping up with costs?
Sound familiar? These are the signs owners describe most often.
- You haven’t reviewed your prices in over a year.
- Quotes are based on what you charged last time, or what a competitor charges.
- Jobs often take longer than quoted, and the overrun is simply absorbed.
- You are busy, but the margin feels thinner every year.
- You lose work to cheaper competitors and aren’t sure whether to match them.
Why do margins shrink when costs rise?
Costs rise on a schedule, prices rise on courage
Wage increases, the annual cost-of-living adjustment, supplier price lists and rent reviews all arrive on their own timetable. A price increase needs a decision, and most owners keep putting that decision off.
Nobody knows the true cost of a job
Without labour hours, materials and a fair share of overheads tracked job by job, a quote is an educated guess. The jobs that lose money look exactly like the ones that make it.
Competing on price with everyone
Malta is a small market and some competitors will always undercut. Matching every low price turns your whole customer base into price shoppers. Knowing your margin by customer shows which ones are worth fighting for.
What a 5% cost rise does to profit
A fictional Maltese business sees its main costs rise by 5% in a year and keeps its prices where they were.
| Line | Workings | Result | Type |
|---|---|---|---|
| Annual sales | €800,000 | Actual | |
| Share of sales spent on wages, materials and other costs that rose | 75% | Assumption | |
| Average increase in those costs this year | 5% | Assumption | |
| Extra cost this year | €800,000 × 75% × 5% | €30,000 | Calculated |
| Profit last year | €64,000 | Actual | |
| Profit this year if prices stay flat | €64,000 − €30,000 | €34,000 | Calculated |
| Price increase that recovers the extra cost | €30,000 ÷ €800,000 | 3.75% | Calculated |
A 5% rise in costs cuts this business’s profit from €64,000 to €34,000, almost half, if prices stay flat. A price increase of under 4% recovers it. That is the arithmetic most owners never put in front of themselves before deciding not to raise prices.
Two-minute self-check
Tick the statements that are true for your business today.
How should a small business respond to rising costs?
In Numbers-First Management, these are the parts of the framework that do most of the work on this pain. Each one is explained in Part 2.
Money Engine
The real cost and margin of every job, product or customer, so prices are set from your numbers, not from habit or from a competitor’s list.
Read the Money Engine chapter →Weekly Dials
Gross margin and quoted-versus-actual hours every week, so overruns are caught on the job, not in the year-end accounts.
Read the Weekly Dials chapter →Quarter Day
Prices are reviewed against costs every quarter, as a routine rather than a crisis.
Read the Quarter Day chapter →Year Map
The yearly plan assumes costs will rise and puts the price reviews in the calendar.
Read the Year Map chapter →Thin margins show up first in the bank account. A business can be profitable all year and still run short of cash in April.
Chapter 6: Cash flow that keeps surprising you →Is this costing your business?
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